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Tariffs and the Exchange Rate: Evidence from Trump’s Tweets

Summary:
Dmitry Matveev and Francisco Ruge-Murcia in this Bank of Canada working paper: US commercial policy during the presidency of Donald Trump led to renewed interest in the macroeconomic effects of trade tariffs. It has become common to use tariffs and other restrictions on international trade in an attempt to boost the domestic economy. One factor affecting the impact of tariffs is the response of local currency after tariffs are imposed. The effects of tariff changes can be eased or overturned if the local currency appreciates and prevents the relative prices of local and foreign goods from adjusting.  The behaviour of the exchange rate following an increase in tariffs has not been fully evaluated empirically because of lack of data and challenges in methodology. Our assessment focuses

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Dmitry Matveev and Francisco Ruge-Murcia in this Bank of Canada working paper:

US commercial policy during the presidency of Donald Trump led to renewed interest in the macroeconomic effects of trade tariffs. It has become common to use tariffs and other restrictions on international trade in an attempt to boost the domestic economy. One factor affecting the impact of tariffs is the response of local currency after tariffs are imposed. The effects of tariff changes can be eased or overturned if the local currency appreciates and prevents the relative prices of local and foreign goods from adjusting. 

The behaviour of the exchange rate following an increase in tariffs has not been fully evaluated empirically because of lack of data and challenges in methodology. Our assessment focuses on the recent renegotiation of the North American Free Trade Agreement (NAFTA).

During this period, a key source of news about tariffs was public communication by the US president—often in the form of tweets. We use the US president’s tweets to quantify how potential and actual tariffs on Canada and Mexico affect their bilateral exchange rates with the United States.

Our results show that the anticipation of higher tariffs on goods imported from Canada led on average to a 0.022 percent appreciation of the US dollar relative to the Canadian dollar within five minutes of the publication of a tweet. In the case of Mexico, the average effect was twice as large—a 0.049 percent appreciation of the US dollar. We find that these numbers are economically and statistically significant.

Interesting how Twitter is being used for economic research.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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